the power of Congress. Chief among them all is Paul v. Virginia, 75 U.S. 168. An insurance contract was held to be not interstate commerce and a condition imposed by the State upon the entry of the foreign insurance company was sustained. Following that case it has been repeatedly declared that insurance is not interstate commerce. New York Life Insurance Co. v. Deer Lodge County, 231 U.S. 495. Of a somewhat like character and antedating Paul v. Virginia is Nathan v. Louisiana, 8 Howard 73, sustaining a state tax on the brokerage business. With these cases also may be grouped Hatch v. Reardon, 204 U.S. 152 (state stamp tax on stock sales), Ware & Leland vs. Mobile County, 209 U.S. 405 (state license tax on brokers in futures); and United States F. & G. Co., v. Kentucky, 231 U.S. 394 (state privilege tax on commercial agencies). Moore v. New York Cotton Exchange, 270 U.S. 593, may be noticed here, though it did not turn on a state statute. A contention that the Cotton Exchange was engaged in interstate commerce was denied and certain relief sought on the ground that the Exchange's monopoly of its price quotations was a restraint of interstate commerce was refused. Mr. Justice Sutherland's statement (at 604) that "there is no averment of fact in the bill on which a violation of the Anti-Trust law can be predicated" probably means no more than that. But these cases do not stand in the way of Congressional power. They may all be put to one side. In the first place, decisions sustaining state statutes over objections on the commerce clause are hardly in point, certainly not authoritative, on the question of the power possessed by Congress. Assertion of the contrary would in effect mean that there is a definite division of power between the Nation and the States in regard to interstate commerce. But we know, the cases make it perfectly plain, that sometimes Congress can regulate intrastate commerce and sometimes the States can regulate interstate commerce. "It does not follow that because a thing is subject to state taxation, it is also immune from federal regulation under the Commerce Clause", said Sutherland, J. in Binderup v. Pathe Exchange, 263 U.S. 291, 311 (federal anti-trust litigation), as he called attention to the fact that "cases cited * * ** upholding state taxation as not constituting an inerference with interstate commerce are of little value to the inquiry here." And see the recent case of Minnesota v. Blasius, 54 Sup. Ct. 34 (state taxation of livestock in the “current of commerce.") In the second place, aside from the emphasis repeatedly put on the personal nature of insurance contracts as taking them out of an interstate commerce classification, Paul v. Virginia and other cases of like character belong to a period prior to the fullest development by the Supreme Court of the present constitutional doctrine concerning the effect of the commerce clause on state power. It will be recalled that up to Cooley v. Board of Wardens, 12 How. 299, there had been differences of opinion in the Court on the question whether the commerce clause per se deprived the States of power to regulate interstate commerce. In sustaining the state action (regulation of pilotage) called in question in that case the Court announced its much discussed doctrine of interstate commerce of two kinds, namely, local and national. As to the former, state action was permissible in the absence of inconsistent federal action (though as a matter of fact the case actually involved the exercise of power by the State supported by an express Congressional permission). As to the latter, state action was inadmissible, it being indicated that in this field the States were deprived of power. Interstate transportation of an article was thought to be commerce of a national character. Consequently, when the Court faced the question, as it did in Paul v. Virginia, where interstate transportation of insurance policies was involved, it would have been difficult to uphold state action if the subject matter, insurance, was conceded to be interstate commerce at all. A further reason for upholding state power came from Chief Justice Taney's doctrine, in Bank of Augusta v. Earle, 13 Peters 519, asserting an unlimited power of the States over foreign corporations. Paul v. Virginia thus belongs to a period not only of uncertainty about the effect of the commerce clause but also of distrust of foreign corporations. Such corporations, it was assumed, must be held in subjection to state power. Difficulty in so doing would be encountered if their activities were classified as interstate commerce. But the Supreme Court long since has pushed the development of the commerce clause to such a point that difficulties of that kind have substantially disappeared. Not only may a State regulate interstate commerce of local character; it may even regulate that which is national in character, if Congress permits it so to do. VI. THE RESPECTIVE FIELDS OF ACTION OF THE NATION AND THE STATES ARE NOT FIXED BY THE COMMERCE CLAUSE BUT DEPEND UPON THE WILL OF CONGRESS As a result of the constitutional doctrine developed around the commerce clause and in the light of a few additional cases presently to be mentioned, it may be said that the true significance of the commerce clause is found in treating it, not as fixing a division of powers between the Nation and the States, but as investing Congress with the primary power and responsibility to do two things; first, to determine, from a national estimate of interstate commerce as a whole, the respective fields of action by the Nation and the States, and second, to use its powers within the national field for advancing the general welfare. The second is clearly established and so well known that the citation of authority is unnecessary. Under the first, however, a greater power than is commonly understood is ascribed to Congress for the purpose of coordinating and harmonizing state and national action. The discernment by Congress of national needs and its initiative (as well as its igenuity) in moving to meet them by means of the power exercisable under the commerce clause have produced the vast expansion of federal regulation in part pictured in the cases cited herein. But, an aspect of the matter not so frequently noted, Congress has also moved in the opposite direction when the general interests so required. It has restricted the effect of the commerce clause in the furtherance of state action. Witness, the Wilson Act (sustained In Re Rahrer, 140 U.S. 545) and the WebbKenyon Act (sustained in Clark Dist. Co. v. Western Md. Ry. Co., 242 U.S. 311) to enable the States to deal with the interstate aspects of the prohibition problem, and the Hawes-Cooper Act (validity not yet passed on) to enable the States to deal with interstate traffic in convict-made goods. The truth of the matter is that Congress has the power to expand or contract the area of national action under the commerce clause. Over against this power is set, of course, the function of the Supreme Court to check the expansion (and possibly also the contraction) if Congress should become arbitrary in dealing with the facts and attempt to go too far. The check is a real one. But that the responsibility is after all upon the Congress is shown by the fact that in the course of the expansion above indicated only three statutes have been held invalid. As far as two of those statutes are concerned, it may well be doubted whether they would be held invalid on de novo proceedings today: The Employers' Liability Cases, 207 U.S. 463 (holding the federal liability act unconstitutional because it included employees injured in intrastate commerce) and Adair v. United States, 208 U.S. 161 (invalidating the federal statute aimed at so-called yellow-dog contracts). Cf. Teras & N. O. R. Co., v. Brotherhood, etc., 281 U.S. 548. Hammer v. Dagenhart, 247, U.S. 251, generally known as the Child Labor Case, remains. Whatever may be thought of the soundness of that case and the theory on which it was decided, it may at least be distinguished on the facts from the present proposal as well as on the objectives which Congress seeks now to attain. It will be noted that the foregoing discussion is directed, not to what may be done in " emergencies", but to the normal powers of Congress. But since, as shown in Part II hereof, the expanded range of Congressional action is dependent upon fact foundations, there is ample room for the play of forces of an emergency character. Ineed, an enlarging function of government to meet new needs is indicated in a passage from the opinion by Mr. Chief Justice Hughes in the recent case sustaining the Minnesota Mortgage Moratorium Law (Home B. & L. Assn. v. Blaisdell, 54 Sup. Ct. 231). Speaking particularly of the contract clause, but possibly with wider implications, he said (at 239): "The policy of protecting contracts against impairment presupposes the maintenance of a government by virtue of which contractual relations are worth while, a government which retains adequate authority to secure the peace and good order of society. This principle of harmonizing the constitutional prohibition with the necessary residuum of state power has had progressive recognition in the decisions of this Court." In view of the national character of the problem here involved and the method of solving such problems on the facts, on the basis of the expansion of power described in this memorandum and on the recognized function of Congress to adjust national and state relationships, it is my opinion that Congress may establish and maintain its regulatory power over security exchanges. It may go further, though how far it may go in the regulation of related and collateral activities will depend on the fact foundation laid therefor, in the hearings and otherwise, and on the considered judgment of Congress concerning the public needs. * Professor Walter Gellhorn, of the Faculty of Law of Columbia University, joins me in the opinions herein expressed. We have been assisted in the preparation of this memorandum by Messrs. W. W. Gardner and T. E. Jenks, both of the Legislative Drafting Research Fund of Columbia University. NEW YORK, March 23, 1934. NOEL T. DOWLING NATIONAL RETAIL DRY GOODS ASSOCIATION, Hon. DUNCAN U. FLETCHER, WASHINGTON OFFICE, Washington, D.C., March 29, 1934. Chairman Committee on Banking and Currency, United States Senate, Washington, D.C. MY DEAR SENATOR FLETCHER: This is a protest against certain of the provisions of H.R. 8720, a bill "to provide for the regulation of National Securities Exchanges and of over-counter markets operating in interstate and foreign commerce or through the mails, and to prevent inequitable and unfair practices thereon, and for other purposes." The President forwarded to the Congress a message calling for the enactment of legislation to regulate stock exchanges to make "certain that abuses are eliminated", and the President further said: "I therefore recommend to the Congress the enactment of legislation providing for the regulation by the Federal Government of the operations of exchanges dealing in securities and commodities for the protection of investors, for the safeguarding of values, and so far as it may be possible for the elimination of unnecessary, unwise and destructive speculation.” It has been apparent to all observers that there would be definite proposals looking toward the regulation of security dealing on exchanges as the outgrowth of the long investigation by the Senate Banking and Currency Committee of what has been broadly termed "Stock Exchange practices." Upon the broad principle that specific legislation was required to correct and endeavor to prevent some of the prior evils, it would seem, there has been universal recognition that such control was both necessary and expedient. It can be said that there has been a national feeling that control of stock exchanges was desirable. Those who were in accord with the basic idea, however, had a very shocked awakening when the bill was analyzed. The bill provides a control of credit by the Federal Trade Commission where the credit is based upon securities as collateral loans. This feature of the bill may itself be divided into four distinct parts: 1. The maximum percentage that may be loaned on any securities listed on a stock exchange is statutorily provided for; 2. Another provision is that such loans may only be made by members of the Federal Reserve system; 3. The prohibiting of loans on all unlisted securities; and 4. The establishment of the Federal Trade Commission as the arbiter of this credit control. The bill goes directly to the control of corporate accounting and management, and again these provisions may be divided into three separate categories: 1. It is provided that corporations whose securities are listed on an exchange must not only file certain specific information with that exchange upon which it is listed, but also with the Federal Trade Commission in Washington. The Commission is also given power to request any additional information that it "may by its rules and regulations require in the public interest or for the protection of investors." It has been suggested that the powers given to the Commission are so broad that it practically sets up the Federal Trade Commission somewhat along the idea of the war-time "Capital Issues Committee " by providing powers to deny a lister filing a registration statement the facilities of any exchange, if it be decided by the Commission that such a listing of an issue was not "in the public interest and for the protection of investors." In effect this section also makes the Securities Act of 1933 retroactive for all listers, and that means that the majority of our large corporations must of necessity file a complete registration statement in such form as the Commission may prescribe in Washington. It further provides penalties somewhat analagous to those contained in the Securities Act for misleading statements, unless officers, directors, accountants, and others can "sustain the burden of proof that they acted in good faith and, in the exercise of reasonable care, had no grounds to believe that such statement was false or misleading." 2. Certain transactions by directors, officers and principal stockholders are declared unlawful and make violators subject to heavy penalties. That 10 days after the close of each calendar month "if there has been any change in his (an officer's, directors, etc.) record or beneficial ownership during such month," in the securities of a corporation, each officer, director and principal stockholder holding 5 per cent or more of any class securities of any issuer "shall file with the exchange and with the Commission a statement indicating his ownership at the close of the calendar month." 66 That if any officer, director or stockholder owning 5 per cent of any class of securities of any issuer who purchased any such registered security with the intension or expectation of selling the same security within six months, and any profit made by such person on any transaction" extending over a period of less than six months "shall inure to and be recoverable by the issuer." It prohibits "any such registered security if the person selling does not own the security sold, or if the person selling owns the security but does not deliver it against such sale within 5 days", which means that the bill would prohibit short selling by officials of any corporation. The requirement is laid down that each security registrant on a national exchange shall file with the exchange and also with the Commission "in such form and such details as the Commission may by rules and regulations prescribe" annual and quarterly reports certified by an independent public accountant, and "monthly reports including among other things a statement of sales or gross income", and such other reports as the Commission may prescribe from time to time. It is also provided under this section that should an issuer fail to provide the Commission with such information as may be requested or laid down in rules and regulations, it will be sufficient justification for the removal of its securities from a national exchange "by the exchange or by the Commission." 3. We also find a provision that when proxies are solicited a list of other persons being solicited must be sent to those who are solicited. Various corporate officials have demonstrated the folly of such a provision, and it is believed that this provision will be corrected to provide simply that a list of stockholders will be rendered to the exchange or the commission, or both. The whole effect of the bill, if enacted into law without very substantial change, would be in my opinion to clothe the Federal Trade Commission with such vast powers as to make it not only the most important branch of the Federal Government, but actually to make it the dictator of the corporate and financial life of the nation. Those who were actively engaged in the actual writing of the bill disclaim any hidden motives of social control of industry through the proposed measure, and scoff at the idea suggested by a great many of our public men that the bill has such purposes. But certainly it goes far beyond what the President specifically called for in his own words, which was the regulation of exchanges for the protection of investors, for the safeguarding of values, and so far as it may be possible, for the elimination of unnecessary, unwise and destructive speculation." 66 Not a word in the President's message points to any desire on his part to go beyond the regulation of national exchanges. The bill violates the principles laid down by experts in their studies of what is actually required to eliminate the practices that have been so greatly condemned. The House Interstate and Foreign Commerce Committee and the Senate Banking and Currency Committee have both held hearings upon the proposed regulatory measure. Before these committees have appeared many of our business leaders and representatives of the financial community have tried to indicate the seriousness of the outcome of a measure of the character that has been proposed if it were enacted into law. There is no reason why absolute, detailed control of corporate management should be exercised through the control of the regulation of stock exchanges. The functions of stock exchanges are to promote reasonable, honest and fair open markets for the purchase and sale of securities and for the dissemination of such corporate information as is necessary for the public to have in order to pass sound judgment upon the securities of listers. Beyond that it is neither fair nor honest to endeavor to rigidly control corporations through the medium of a proposed stock exchange regulating bill. The agency given such broad powers under these bills is the Federal Trade Commission. This Commission has never before operated in this field unless it may be said that they have gained certain knowledge of securities through the administration of the Securities Act. This, however, is hardly the type of experience that is necessary to formulate sound judgment on credit control, which rightfully falls in the experienced hands of the Federal Reserve Board with the supplementing assistance of exchanges themselves, who are equipped to supply much technical information regarding the loan values that should be placed upon securities. There should be no setting up of a great bureaucracy in Washington to dictate every single detail of what a corporation may and may not do, or what sort of accounting system they may operate under, and all of the other multitudinous affairs it is proposed to bring under the wing of the Federal Trade Commission. As I have previously pointed out, many executives have appeared before the committees and given their views, pointing out the far-reaching effect of what the proposed bill means to every banker, insurance company, corporation and individual who handle securities, who issue securities or who own securities. It must be said, however, that industry generally is not alive, it would appear, to the dynamite contained in this proposed bill. If this legislation is passed as written, or even with some of the minor amendments that have been suggested by the drafters as a peace offering to those who have raised objections, it will mean that the country will at a future date realize that they not only have an onerous Securities Act to contend with but also a piece of legislation that goes far beyond anything heretofore conceived. The statutory powers set out in this bill in almost every section of the proposal provide the Federal Trade Commission, heretofore mainly identified with inquisitorial investigations, with the power to assume command over each and every corporation having securities listed on even the smallest exchange, of not only information to be supplied in order to keep their securities listed, and it is impossible to use unlisted securities as collateral, but also to operate their business in such a way that it receives the approval of this Commission. The bill also provides for the regulation of transactions in all securities other than those listed on an exchange which may become licensed, that is, where their sale may involve the use of the mails or any instrumentality of interstate commerce. One must draw upon his imagination or personal experience to visualize just what this means. Many of us have seen to what lengths a Bureau once established with powers to act may go in the direction of exercising those powers. It will be seen, therefore, that the bill involves important considerations not only to the corporations whose stock or other securities may be listed on some exchange, but to the securities of all other corporations regardless of their soundness or character, and certainly every present security holder in the nation should be genuinely interested. Objection is not directed to the provisions of this bill dealing with the stock market regulation except insofar as the provisions of the bill tend to put business or mercantile corporations in a straight jacket and vest in the Federal Trade Commission or other governmental agencies jurisdiction to dictate accounting methods and reports, the burdens of which may prove exceedingly onerous. Respectfully, NATIONAL RETAIL DRY GOODS ASSOCIATION, Washington Representative. |